Pierre Bourgeois
Partner | CPA, CA | Tax

Below is an update for certain items discussed during the Raymond Chabot Grant Thornton international tax seminar held on April 18 and 19, and resulting from the April 26, 2017 Canada Revenue Agency (CRA) and Finance Canada (Finance) round tables of the Canadian chapter of the International Fiscal Association (2017 IFA round table). We also outline other items of interest from the 2017 IFA round table.

Unless otherwise noted, legislative references in this document are to the Income Tax Act, RSC, c.1 (5th Supp.) and its regulation.

18 May 2017  |  Written by :

Mr. Bourgeois is a partner at Raymond Chabot Grant Thornton. He is your expert in taxation for the...

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Marie-Pierre Pelletier
Senior Director | Tax

Companies established in many countries cannot escape transfer pricing.

Transfer prices are the prices at which related entities located in different countries trade, including the sale of goods, services or intellectual property.

In Canada and most countries, these prices must be established by respecting the arm’s length principle, which stipulates that the conditions for related entities’ transactions must be the same as those that would have been agreed upon by non-related entities.

While companies established abroad must comply with transfer pricing rules, they can also use them to optimize their tax situation. Therefore, it is in their best interest to know these rules as soon as they plan on expanding abroad.

A planning tool

The proper use of transfer pricing can help a group minimize its tax burden. In fact, economic theory states that the greater the work performed, risks assumed and assets held, the higher the expected returns. Therefore, it would be to a group’s benefit if value-added functions, valuable assets and high risk activities were within a jurisdiction with a lower tax rate since a greater portion of the group’s profits will be taxed at a favourable rate.

Documenting transfer pricing

The Canada Revenue Agency (CRA) is one of the most aggressive tax bodies in the world when it comes to auditing transfer pricing. When it deems that the arm’s length principle is not being observed, the CRA can adjust the transfer pricing and impose a penalty. This penalty will apply if the adjustment increase exceeds the lesser of $5,000,000 and 10% of gross income.

However, the penalty will not apply if the taxpayer can prove that, through transfer pricing documentation, serious efforts were made to comply with the arm’s length principle. This documentation is therefore essential for companies established abroad as it must provide a complete description of transactions between the group’s entities and demonstrate the method used to determine the transfer pricing.

Your Raymond Chabot Grant Thornton consultant can help you better understand these issues.

15 May 2017  |  Written by :

Ms. Pelletier is a senior manager at Raymond Chabot Grant Thornton. She is your expert in taxation...

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Suzanne Breton
Senior Manager | MBA | Management consulting

What luck! A new client from Asia has just placed a $250,000 order. It’s your first international order. But are you well prepared for this?

What happens if, for example, during shipping, the merchandise gets stopped at customs? It goes without saying that the client won’t pay until he’s received the goods…Result: your dream turns into a nightmare.

We’re not trying to discourage you; we’re just trying to show you the importance of properly planning an export project. Here are five steps to follow.

1. Give it some proper strategic thought

First, ask yourself if exporting is truly one of the best growth strategies for your business. If so, are you ready to devote the necessary time and resources? At what cost?

As applicable, this project must have the full support of management and be integrated into the company’s overall strategy.

2. Analyze all export aspects

Then, analyze whether the company’s main functions are able to realize this project, in particular:

  • Human resources: Do you have enough employees and are they well trained? For example, you would like to export to Mexico, but do your representatives speak Spanish?
  • Production: Are you able to respond to an increase in demand? Should you obtain larger facilities or purchase additional equipment? If applicable, how much will you have to invest?
  • Marketing and distribution: Should you review your marketing tools? What distribution method will you use?
  • Financial and legal resources: What is your short- and long-term financial capacity? How much will international development cost and what means of financing have you planned? Would you be able to protect your intellectual property abroad?

Completed with the help of external experts, this analysis will help identify the company’s weaknesses with regard to the general export risks and challenges, and develop an action plan in response. Above all, don’t dream of rapid returns: it could take years for an export project to become profitable.

3. Target and analyze your market

Don’t target all the markets. Choose the most attractive market for your business by conducting a study to understand the business dynamics of this market, your future clients’ profile, barriers for entry, etc. You will learn the rules of export at a lower risk.

Then, make sure you analyze the potential and characteristics of this market by going to visit as often as possible.

Are you considering the United States? Don’t forget that each state has its own requirements.

4. Develop a strategy for this market

You may then develop an operating and marketing strategy tailored specifically to this market. How will you penetrate this market (through a partner, an established distribution network, by delegating representatives, etc.)? How will you organize the logistics (transportation, customs, etc.)? What will your marketing strategy be for this market?

N.B.: What works well at home may not necessarily apply abroad. It may be necessary to innovate and adapt your products and services to meet the expectations of the targeted market.

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5. Analyze your financial needs

Lastly, thoroughly analyze the project costs related and examine financing possibilities. Pay particular attention to expenses that seem minor, such as travel. The bill will quickly add up if you travel several times to China!

There is a wide range of financing options through export loans and subsidies. We will be pleased to guide you and help you plan your international growth.

15 May 2017  |  Written by :

Suzanne Breton is a senior manager at Raymond Chabot Grant Thornton. She is your expert in...

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Martin Laforest
Advisor | MBA | Management consulting

There comes a time in the life of any business when it needs financing. Some hints on how to structure your approach and improve your chances of getting the necessary financing, be it at the start up phase, during an expansion or for an acquisition are presented below.

1. Be realistic about the possibility of getting subsidies

While business owners may dream of getting partly or fully non-refundable contributions to finance their business, this option is not available to everyone. It might look like some businesses have a knack for easily finding subsidies, but, often, it’s a matter of circumstances.

It’s unlikely, for example, that you can get major subsidy financing to open a restaurant. On the other hand, in some cases, over 80% of the research and development activities of a biotechnology company could be financed. Generally, the agri-food (other than restaurants), culture, high tech and industrial manufacturing sectors are more likely to qualify for subsidies than retail or service businesses. Nevertheless, regardless of the type of business you operate, you should look into the programs available, particularly in the areas of labour training or product development.

2. Don’t start your business without having planned the financing

Believe it or not, some entrepreneurs start their business plan without validating all the costs beforehand and ensuring that they have the necessary financing. Most of the time, they quickly find themselves short of funds and unable to finish their project. That’s when they turn to their financial institution for financing and end up having to deal with complex and endless processes.

Other than the lack of funds, what makes creditors reluctant in such a situation is the manager’s attitude. Entrepreneurs who launch a project without first validating the costs and their ability to cover them show a decided inability to plan and manage. A potential investor could view this as risky behaviour.

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3. Make sure you have sufficient guarantees

Investors always want to protect their investment, so asking for a guarantee is an essential step. It’s not surprising that your financial institution will want to use the equipment you’re about the purchase as collateral. People often forget, though, that a business’s financial health is a far more important guarantee than a mortgage. Your financial institution will not automatically grant a loan simply because you can provide the equipment as security. The lender generally has no interest in realizing the guarantee if the business is not doing well. Creditors rarely come out ahead by seizing a client’s property and having a bankruptcy trustee sell it. However, they will be on the winning side if their client is successful and wants to borrow again for a future expansion phase.

 

When financing a business, common practices include requiring a mortgage and personal guarantee and sometimes, other guarantees may be required. This may be the case, for example, if your financial institution requires a universal hypothec on all of the business’s present and future property. This is not necessarily a problem provided you have a good business relationship with your bank and know your projects will be supported. It could become a burden though if you don’t have your creditor’s support.

4. Consider alternative financing sources

Business owners sometimes forget that banks are not the only sources of financing. There is a considerable range of organizations that provide funding, such as government departments, business development banks, local organizations and specific funds. In fact, there are so many potential sources that financial institutions and organizations are developing increasingly persuasive strategies to attract new clients. What they all have in common is the will to finance a project with minimal risk on their part. If your financial situation is precarious and your project quite risky, you may not find anyone willing to lend you the funds. In some cases, you could consider having several creditors share the risk. In others, you could resort to more costly strategies, such as lease financing for equipment. This option should not be considered without first having examined all other possibilities.

5. Build a relationship of trust with your creditors

Getting financing can depend on the relationship of trust you are able to develop with your lender. There is nothing to be gained trying to gloss over any financial difficulties your business may be experiencing or even trying to hide a bankruptcy that dates back 20 years. In any event, this will likely come to light anyway. Your honesty in dealing with your lender will certainly be a factor should you need additional financing because of difficulties. A poor manager will almost certainly fail, even with a good project, but a good one finds a way to pull through, even during difficult times. It’s up to you to show your lender what type of entrepreneur you are.

6. Plan your working capital requirements appropriately

In most business projects, you need to plan properly so you have sufficient working capital to see you through until you start earning some income. Usually, it’s not easy to accurately predict when and how much money will be needed. Not only must you avoid underestimating what’s needed, you also have to provide for enough manoeuvrability in the event sales are not as high as anticipated. It’s better to have some excess cash at the beginning rather than having to ask for a new loan, which could be seen as an inability to assess your needs and your business project’s potential profitability.

One of the most complex aspects of working capital is being able to convince your lender to inject significant cash from the outset, even if you don’t think you’ll really need it. This requires preparing sufficiently optimistic financial forecasts to convince the lender that are also just pessimistic enough to justify the need for considerable working capital. It’s a very fine line that divides the two.

7. Consider your lender as a business partner

When lenders refuse a loan application, it’s not necessarily because they don’t fully understand the project. On the contrary, they may have understood it very well. Lenders generally have extensive business experience and a wide range of clients. They know which businesses are profitable and which are not. They are in an excellent position to grasp your project’s potential, especially if you are newcomer to the business world.

Good lenders will consider themselves to be a business partner. Unless they see serious problems in your business, they won’t tell you how to manage it, but they will help you find ways to improve your management if necessary. As with any business partner, they’ll support you during difficult times, but not at any cost. When you’re earning income, they are as well, but if you’re losing money, oftentimes, they are also. They may be prepared to inject more funds in your business when you need some, but they will expect you to be prepared to do the same. Business managers who consider their lenders as their business partner significantly increase the chances of building attitudes that contribute to obtaining financing when they need it.

04 May 2017  |  Written by :

Mr. Laforest is an advisor at Raymond Chabot Grant Thornton. He is your expert in management...

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